If you are an employee, you have probably been offered the option of registering for a 401k plan at your workplace. This is the method in which your employer gives you a retirement option. The name is the same as the section of the tax code that the plan is outlined in. IRAs can be opened by an employee independently of an employer by yourself.
A 401k can only be offered by an employer though. If you are self-employed, you can offer it to yourself (although this would lead to a rip in the space-time continuum). There are a few differences between 401k accounts and the IRA plans. You need to do your research on a deeper level before you decide whether you want one of them (or even both).
Custodians and assets
An IRA is managed by a “custodian”. This can be a bank, a broker or even an individual the account holder trusts. Different custodians allow for different kinds of assets to be invested in within the IRA, such as stocks, property and others.
According to the IRS tax code, there are some exclusions to this rule. For example, fine art cannot be held by an account holder as an asset within an IRA. However, some custodians do allow you to buy gold for an IRA account if you want to.
A 401k account can only hold currency, because the custodian in this case is the employer.
Contributions and tax deduction
When it comes to the IRA, there are a couple of options in terms of contribution and taxes. The traditional IRA account is tax deferred.
This means that contributions are made before income tax is deducted from the contribution.
In a Roth IRA, the contributions are taxed before they are deposited in the account. Each has its own benefit.
A 401K is tax deferred by default.
Loan options
For a 401k, the employee who owns the account is allowed to take loans before they retire. These are only permitted by some employers. The payment for the loan is taken out of the salary on a monthly basis at a flat rate of interest.
The IRA doesn’t allow withdrawal of money before the retirement age or age of eligibility. There is an exception to this rule though. Holders of an IRA account can withdraw a maximum of $10,000 to help them buy or build their first home.
SIMPLE IRAs, SEP IRAs and the 401K
Simple IRA accounts are those in which the contribution of the employee is matched by the employer. This is something like the normal 401k, in which both parties can contribute. The SEP IRA is one in which only the employer can make contributions.
IRAs aren’t usually offered by an employer, but when they are it is important that you consider the other options carefully before indicating which you would like to invest in. There is nothing that would help you decide on the best one for you than the careful consideration of all your alternatives. Making an informed decision could literally give you a better life in the future.